MACRO WATCH Global: The potentially adverse impact of the Greek crisis on the Bulgarian banking sector is among the major concerns facing the Bulgarian economy. Given that some of the largest banks and other financial institutions in Bulgaria are owned by Greek companies, the stability of the Bulgarian financial sector in the face of Greek collapse has been called into question. Despite its strong commitment to the Greek banks, however, Bulgaria’s banking system has built in various buffers against external shocks.

The most robust protection of the Bulgarian banking system against external shocks is that most foreign banks operate in the country as subsidiaries. European Union bank subsidiaries manage 70% of the total assets of the Bulgarian banking system, while the market share of the EU bank branches is just 4% of total assets. Although they are owned by foreign investors, these subsidiaries operate in the country under the regulation of the Bulgarian National Bank and meet local capital requirements – the Tier 1 capital adequacy ratio required by the Bulgarian banking system is 12%, which is higher than the minimum requirement (8%) in the EU. For the first quarter of 2012, the Tier 1 solvency ratio of the banking system was 15.84%, whereas the total capital adequacy ratio was 17.52%. The largest share of the Tier 1 components (original own funds) comes from eligible reserves, reaching EUR 5.0 billion. Eligible capital reached EUR 4.07 billion in the first quarter of 2012.

Bulgarian banking system also enjoys relatively high liquidity level. At the end of 2011, the liquidity coefficient reached 25.57%, which is among the highest in the EU. The liquidity coefficient of Group 2 Commercial Banks, which includes three of the five Greek-owned banks, was 24.98%. In addition, Bulgarian banks have made great efforts to develop the local deposit market in the last three years. Since the beginning of 2011, total deposit soared by more than 30% while the credit aggregate rose by 7%. This helped Bulgarian banks to finance their lending activity with depository funds and make them relatively independent of the international market funds.

Despite the relative stability of the Bulgarian banking and financial system, there are some significant risks from spill over effects of the Greek crisis. Greece is the fourth largest destination for the Bulgarian export goods, and Greek companies are among the biggest foreign investors in Bulgaria, with foreign direct investments of EUR 2.85 billion in 2011. Greek enterprises hold almost 8% of foreign direct investment stock in Bulgaria. Since 1997 Bulgaria’s currency has been pegged to the common European currency, and depreciation of the euro, induced by Greek default, will undermine confidence in Bulgaria’s financial system.